WHAT JUST HAPPENDED?
In the Chinese US trade war, one thing is certain. Currency manipulation is a common Chinese trade tactic, but its efficacy is based on American dependence on Chinese produced goods, seen as beneficial because of cheap labour.
WHAT DOES THIS MEAN?
There’s a constant fear that China would sell their massive US bond share but this isn’t as big a danger as many make it out to be. Despite many claims to the contrary, the majority of US debt is not held by China, China is merely the largest foreign holder of US debt (7% of total US debt). The majority of US debt is held by agencies run by the US federal and state governments, American firms and American banks (67%). Even if China sold off their bonds it would cause a slight devaluation but it wouldn’t be crippling. China, on the other hand, derives a large portion of it’s GDP from the payments it receives from it’s US bonds. Selling off US bonds would hurt China a lot more than it would hurt the US
China’s other economic weapon, cheap labour, is also not as big a threat to the US as most commentators would have the public believe. The fear is that China could stop selling cheap products to the US and go elsewhere for buyers, leaving America without it’s cheap iPhones and handbags. Ultimately, this is only a threat to American Big Business with minor ramifications.
HOW DOES THIS IMPACT THE LEGAL SECTOR?
Should America be cut off from the ‘benefits’ of cheap Chinese labour the country would have alternate options. The most desirable but least likely would be for American companies to bring industry back to the US, pay it’s workers fair, liveable wages and accept a profit decrease[1]. Big business wouldn’t do this if society was collapsing around their ears. Consequently, they may increase efforts on their multi-decade practice of lobbying against worker’s rights and for decreased working conditions. Only this time, with the intent to create standards comparable to those in China. Perhaps the lack of realism attached to this idea remains vastly overshadowed by the uproar any drastic attempts to reduce workers’ rights would cause.
It is probable that US businesses may then look at alternative countries that can generate a similar profit margin like China and so may opt to set their business in Vietnam, Malaysia, or the Philippines to exploit the cheap labour market. This is essentially what the Trans Pacific Partnership is and why China was excluded from it. On the contrary, it can be argued that by leaving China, this would hurt China more as America is the biggest consumer market in the world, followed closely by Europe (who is more reliant on American trade than it is with China). This would leave China with South American, African and former Soviet Bloc countries to trade with, none of which are a comparable replacement for the US.
There is also the massive trade deficit in China’s favour, America gets cheap Chinese goods but rather than buying American products, China uses currency manipulation to receive large payments in dollars, gold and silver[2]. The US government would benefit by cutting trade to China, but Big Business would not, so the trade imbalance remains.
Evidently, the relationship between China and US could become permanently soured if an all-out tech war begins and the US forces it’s private undertakings to move their business from China. This could cause a major hurdle for law firms who will have to advise their clients of a seismic shift in the market. For example, the age old rivalry between Samsung and Apple will be rekindled and could lead to a winner.
Samsung’s Google Android phones will experience some advantages if Apple attempt to sustain their huge profit margins. Apple’s production is based on heavily subsidised manufacturing in China. Identifying and transitioning over to a comparably efficient and reliable supply chain will be difficult, their over reliance may cause significant alarm to the inner workings of their business and their inability to quickly adapt to change. Over-reliance on the Chinese industrial market will create problems and could lead to a significant decline for Apple’s evidently inflated valuation.
In contrast, Samsung produce their televisions/video monitors using Korean and Japanese manufacturers. This could be a key opportunity for Samsung, who’s lawyers will need to advise from a business and legal perspective to ensure that they can take advantage of this in the tech market. The decline of Huawei has coincided with the decline in Sony’s microchip production profitability[3], however mounting fears that this aspect of their business may become obsolete should now be eased as the losses can be supplemented through a general growth in the market. In further positive news, Lee argues[4] that a potential stockpiling of chips by Chinese companies could result in a shortage for America. This can again be used to the advantage of Sony as they may look to increase the prices of their chips to meet the demand.
Dell will share the same fate as Apple in China as it’s increasing reliance on Chinese manufacturing and supply chains will make their competitiveness fragile if forced to leave China. The investment in production and marketing the brand will therefore be wasted.
Written by Amarjit Tark
ASSESSING FIRMS:
#Freshfields Bruckhaus Deringer LLP#Linklaters LLP #Slaughter and May #Allen & Overy LLP #Ashurst #Clifford Chance LLP #Herbert Smith Freehills LLP #Baker McKenzie #Hogan Lovells International LLP #Kirkland & Ellis International LLP #Latham & Watkins #Macfarlanes LLP #Norton Rose Fulbright #Pinsent Masons LLP
References:
[1] Tom Fowdy ‘Biden is picking up where Trump left off as US readies itself for a titanic tech cold war with China’ 9th April 2021 < https://www.rt.com/op-ed/520612-biden-us-cold-war-china/ >
[2]Weizhen Tan ‘The yuan won’t unseat the dollar soon — but it could grow in prominence if China dominates in tech and trade’ 1st September 2020 < https://www.cnbc.com/2020/09/02/outlook-for-china-yuan-and-the-us-dollar-amid-tech-war-trade.html >
[3] Financial Times ‘Huawei’s fall hits Sony’s chip business’ 7th June 2021 < https://www.ft.com/content/353138d3-ae45-4771-8104-b0dfebec9241 >
[4] Leonard Lee ‘The US China Tech war puts leadership at a crossroads, 25th June 2021 <https://www.fierceelectronics.com/electronics/u-s-china-tech-war-leadership-at-crossroads-lee >
Disclaimer: This article (and any information accessed through links in this article) is provided for information purposes only and does not constitute legal advice.